China debuts new LPR, actual loan costs unlikely to drop: analysts

Source:Global Times Published: 2019/8/20 17:28:20

China on Tuesday announced its new loan prime rate (LPR), in accordance with forecasts and slightly lower than the old benchmark. To achieve the initial goal of reducing corporate borrowing costs and supporting real economy, LPR reform still needs supplementary measures and some time, analysts said.

China lowered its one-year LPR to 4.25 percent, 10 basis points lower than the old benchmark lending rate, and 6 basis points lower than the former LPR. The new five-year LPR is 4.85 percent.

Under the LPR reform measures announced by the People's Bank of China (PBC), China's central bank, the new LPR is linked to the PBC's medium-term lending facility (MLF), which is determined by broader financial system demand for central bank liquidity.

The new market-oriented reform measures were introduced to solve companies' difficulty in seeking affordable financing amid the overall downward pressure of the economy, PBC official told a press conference on Tuesday.

Yet analysts noted that the new LPR mechanism may not have an obvious impact on reducing loan costs in the short term.

The minor reduction in LPR is in accordance with outside forecasts, but LPR is only a lending reference rate that commercial banks charge their best clients. Its reduction doesn't represent the actual loan interests cut, and can't put restrictions on the actual loan rates that banks offer to mid- and small-size companies, said Lian Ping, chief economist of the Bank of Communications.

Under the new LPR reforms, it's necessary to reduce the MLF interests to reduce lending costs. PBC is expected to further release liquidity, lowering the interest rate in the currency market, so as to offer room to reduce MLF interests, Lian said.

The new LPR mechanism doesn't equate to interest rate cuts. The former is a reform measure on the mechanism, the later is currency policy. New LPR moves don't have the same effects as an interest rate cut; they will have a long term influence on the interest level, Lian added.

China's new LPR moves will not bring down mortgage rates. The financial sector should not depart from the policy direction of curbing real estate speculation. Real estate should not be used as a tool to stimulate economy growth, PBC Deputy Governor Liu Guoqiang said at the press conference.

China's stocks edged down on Tuesday. The benchmark Shanghai Composite Index closed 0.11 percent lower to 2880.00 points, while the Shenzhen Component Index closed 0.24 points down to 9328.73 points.

Posted in: ECONOMY

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